IMF’s Lipton: Geopolitical Risks Cloud Global Recovery

The world’s top finance ministers and central bankers on Sunday wrapped up the spring meetings of the International Monetary Fund and World Bank in which they grappled with a host of issues that threaten to destabilize the global economy. The IMFs No.2 official, David Lipton, sat down with The Wall Street Journal to discuss the key takeaways. Here are excerpts:

There’s some sense that the world economy is improving, and that has led people to be more calm about the situation…the risks have receded.

The greatest risk if complacency.

There’s continued need to address the legacy of the crisis countries that still have problems with indebtedness or banking-sector issues and countries that have adjustment needs, countries in Europe, that need to continue to build on competitiveness.

There was a bit of a pivot in people’s thinking from the short term to the medium term because people have the sense there isn’t so much short-term crisis risk, and I would say many ministers and governors said that it was right to be focusing on growth…And the right way to do that is to put more stress on structural reforms that will raise productivity.

In the U.S. and in Japan, there appear to be some prospect for moving towards their targets. In Europe, the risk is that low inflation might become embedded. We see the inflation rate in our baseline rising, but not rising to the ECB’s target… We’ve been drawing attention to the need for them to fulfill their mandate, it’s no more complicated than that.

We do that because low inflation inevitably goes along with low growth…As Draghi himself said in several settings, low inflation in a setting of low growth and high real interest rates makes deleveraging, which is important to Europe, difficult. And it makes the adjustment of relative prices to restore competitiveness in the peripheral counties that have that issue, it makes that more difficult.

On other risks to the global economy:

We’ve been clear to express our concern about whether the exit from the unconventional monetary policy will be smooth or bumpy, and that’s partly about the U.S, and whether the evolution of policy will permit the U.S. to make a smooth exit or not, whether the path of the exit will be something they can convey to the markets and the markets will understand.

Whether the asynchronicity of monetary polices around the world with the Fed probably exiting first, will it mean movements in asset prices or exchange rates, and will it be difficult for the world to digest.

There was a fair amount of concern expressed by ministers and governors about financial stability. Everyone feels comfortable that financial and regulatory reform has been a success, that the process of financial and regulatory reform leaves most banks in advanced economies stronger and more likely to be stable. But there are segments of the financial system, including in the non-bank, the shadow banking area where there are concerns about financial stability. Partly it’s about whether the regulatory agenda is complete. And partly it’s about whether risky activities are migrating from the banking sector to the shadow banking sector, and whether the continued low interest rate environment…is creating pockets of instability.

The new set of risks are geopolitical risks. Most of the attention is to the question of what’s happening in the Ukraine, and the relationship between Russia and the U.S. But we’ve also pointed to the geopolitical risks in the Middle East, what’s happening in Syria, and geopolitical risks in terms of the relationship between China and Japan. So there are geopolitical risks that are a bit more on the radar screen than in past years, and given the fragility of recovery, they’re more salient than they might otherwise be.

Almost all of the vulnerabilities would be lessened in a more dynamic global economic setting: The problems of the inheritance of debt, the problems of lack of competitiveness, the vulnerabilities of particular emerging-market countries to volatilities.

On the Ukraine crisis:

First and foremost, there was universal support for our efforts to try to help Ukraine overcome its crisis, stabilize their country and restore growth. But at the same time, the U.S. and European countries expressed concern about Russian actions, and whether those actions might even frustrate of even undermine the objectives of the IMF program, and countries were concerned about if there are further rounds of sanctions, in either direction, whether those could lead to a situation where there are economic spillovers to Eastern Europe, Central Europe or even Western Europe.

I think our members are concerned about the uncertainties around this program. It is a large program … and we’ve based this program on our assessment that Ukraine’s debt is with high probability sustainable. But there are the uncertainties that come from the geopolitics that mean the implementation of the program is hostage to some geopolitical crisis.

Russia went into this period with an economy with growth slowing and its own set of economic challenges.

The sanctions themselves and the uncertainties that have come from the sanctions will certainly contribute to Russia’s economic difficulties.

We don’t see that the sanctions that have been imposed in either direction as being of overwhelming economic importance yet. But we certainly don’t rule out that a future round of sanctions or counter-sanctions could be extremely consequential for Russia, Ukraine and Europe.

Everyone is frustrated and disappointed at the failure of the U.S. to ratify the reforms. That’s because they care about the legitimacy of the institution.

The membership broadly rallied, not without reservation, supporting the approach we’ve taken, which is to create space for the U.S. to continue trying over the course of this year to achieve approval. At the same time…if there has not been success on this front with Congress by the end of the year, then other alternative approaches might be considered.

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